In advance of Colliers’ Flexible Workspace Outlook Report 2019 for APAC we have set out some forecasts and trends here which we will explore further in the report, due for release in Q2.
2019 should see the flexible workspace sector evolve again with new iterations that will continue to disrupt traditional views of what the sector is and what it can offer on a large scale, as it cements its place as a mainstream real estate asset class, here to stay.
Flexible workspace operators will blur the lines between workspace and amenities, creating value for the user, lean toward premium workspace design, and continue to pioneer new products to benefit occupiers and, critically, their workforce. It will gain further landlord traction with deeper partnerships, grow by M&A, go deeper into niche sectors, and firmly establish an asset class of its own. However, we also note how the sector is impacting the conventional valuation methods and definitions of take-up.
Amenitisation : A full suite of services
This is a trend we forecast in 2018 – where we suggested lines between workspace and amenities would blur and flexible workspace operators would no longer exist in a silo but become part of the building fabric – and we believe this will become mainstream across Asia Pacific in 2019. Landlords in Australia have been creating lounge spaces or “third spaces” in their buildings for several years and we expect these to evolve – by adding event spaces, a suite of meeting rooms, wellness facilities and F&B – and be adopted by landlords in Asia.
Landlords will either self-perform or leverage the flexible workspace sector to create a range of amenities to serve their occupiers. The Work Project will be delivering amenity spaces across CapitaLand’s portfolio, together with flexible workspace. Hongkong Land are set to launch an owner-operated space with added amenities for occupiers and Swire Properties have run their own space, blueprint, for several years.
Premium Design : From raw to refined
While there is certainly a place for the rough and ready “coworking” space and the executive serviced office of old we believe that genuine premium product will rise to prominence in the flexible workspace sector in 2019. Again, something we also forecast in 2018, but it will become even more relevant and in demand this year as multinational corporations further incorporate flexible workspace into their occupational real estate strategies.
Cramming an end user in to a small glass box with cheap furniture is no one’s idea of an inspiring workspace and in no way is this conducive to productivity or wellness, only offering a cheap office space to satisfy bottom lines. Occupiers will begin to look more at less tangible metrics such as wellness, staff retention and productivity rather than the obvious financial benefits of squeezing space densities. Meanwhile landlords must be mindful of this trend and that the workplace needs to become a more experience-driven environment and the arms-length, light-touch, transactional era is coming to an end.
Well-designed space that offers the end user a range of work settings – activity-based working – will become common in newer flexible workspace locations hitting the market and, as occupiers take larger spaces as part of their strategy, this will drive a raising of the bar in workspace design.
New Products : What’s your flavor?
An ever-increasing range of products will make flexible workspace even more accessible and reach greater parts of the commercial real estate industry in 2019. In addition to the usual hot desk, fixed desk and private office options there are now more products coming to market such as those pioneered by WeWork including; WeWork GO allowing users to pay-as-you-go, Powered by We which is a standalone design and build concept, and HQ by We which delivers bespoke solutions. Other operators are offering similar concepts; The Executive Centre has had success with their Enterprise Solutions and Customised Suites products, and Australian landlord Dexus has launched Suite X which offer fully furnished spaces on flexible terms. We expect an even greater range of products to hit the market in 2019, to be driven, in part, by yet more new entrants to the Asia market from UK, Europe and US.
Landlord Partnerships : Going deeper together
We previously forecast deeper landlord operator partnerships in our 2018 paper. Major landlords must decide whether to self-perform flexible workspace and amenity spaces, acquire an operator, invest in or partner with an operator – this decision will hinge on whether the landlord wishes to switch from a transactional business to a service business.
We expect landlords to lean toward partnerships with operators who can demonstrate a genuine value add to what the landlord wishes to deliver to their occupiers. There is little value in partnering with an operator who is simply in lease arbitrage. Instead a landlord should determine the vision for an asset on a case-by-case basis (rarely does a portfolio-wide approach work, as every asset has nuances that set it apart) once the vision has been determined the landlord should seek the most suitable partner to achieve that vision.
M&A : Marriages and new arrivals
We expect M&A to make headlines in the market throughout the year ahead. 2018 saw WeWork acquire naked Hub, while Ucommune swallowed up seven operators across Mainland China. However, we forecast a much greater level of activity in 2019, driven by two separate factors – firstly, new entrants from western markets (mainly UK, Europe and US) entering Asia Pacific by way of M&A, and, secondly, operators in Asia coming together to create higher marriage values and form robust regional offerings.
Niche Sectors : Industry-centric space
As the sector matures we foresee industry-specific offerings emerging to offer greater diversity and service differing needs. Campfire have been the leader of this to date, with spaces specific to fashion, media, fintech, hospitality and design. We expect to see further locations catering to specific industries going forward and we may see this model further adopted by landlords who are looking to create destination assets in their portfolios.
Asset Class : Recognition and acceleration
The Royal Institute of Chartered Surveyors (RICS) are in the process of developing a white paper for the valuation of flexible workspace. This will lead to the creation of a separate and recognised asset class, which would mean the sector could be primed to become part of institutional portfolios.
A move such as this will open the door for accelerated growth and opportunities within the sector.
Sector Measurement: Take up or fake up?
To wrap up our forecast, one note of caution – the danger of “fake up”. Approximately 40% of the take up in Hong Kong in the first half of 2018 was by flexible workspace operators. However, is this really take up as the space taken is essentially repackaged and put back on the market at a premium.
In most cases flexible workspace operators have solid occupancy levels, but some don’t. This leads to the question of whether the market vacancy rate figures that impact property valuations are based on incorrect data.
We believe the office vacancy rates would have been higher than reported under traditional research methods, across most markets, if analysts looked at the occupancy rates within flexible workspace, given the aggressive operator take up. Most market observers report vacancy rates in buildings with the assumption that flexible workspace is essentially 100%, this is clearly not the case. As the scale of the sector grows there needs to be greater visibility on these occupancy levels to ensure market data that impacts valuations are correct.
We are excited to bring you our next edition of Colliers’ Flexible Workspace Outlook APAC 2019 coming in early Q2.
Published: 18 January 2019
By: Jonathan Wright - Director of Flexible Workspace Services
Colliers Hong Kong